3 reasons why oil prices rebounded this week
After a sharp drop that saw oil prices slump below $ 70 / bbl for the first time in months, oil bulls appear to be regaining control. Crude oil climbed nearly 5% Monday after Saudi Arabia has raised its prices for buyers in the United States and Asia, a clear signal that the oil giant sees demand remaining strong despite the emergence of the COVID-19 omicron variant. WTI crude was listed at $ 71.53 / bbl during Tuesday’s intraday trading while Brent traded at $ 74.92 / bbl as both benchmarks were released six consecutive weekly drops.
Oil prices have also risen following reports from South Africa that omicron cases have so far been mild, with Dr Anthony Fauci saying the variant has not appeared to produce a “great deal. severity “in cases so far.
But more importantly, the actions of OPEC + ministers at the last virtual meeting also injected much-needed enthusiasm and optimism into a market that has been austere for weeks.
When OPEC + held its last ministerial meeting on December 2, the majority of pundits expected the cartel to announce a pause in the streak of 400,000 barrels per day (kb / d) m / m increases in production target based on the fact that the Omicron variant represents another source of downside demand risk while Q1 balances appear low.
However, ministers surprised markets by agreeing to increase the target to 400 mb / d in January, bringing the total increase under the July 2021 deal to 2.4 million barrels per day (mb / d) j).
However, the ministers conditioned the increase through the use of an elegant device: the December meeting is formally still in progress; and the press release states (in underlined text), “The Assembly remains in session”.
The implication of this move, according to analysts at Standard Chartered, is that OPEC + may choose to withdraw the latest increase on the fly at the first signs of negative short-term developments. The idea of keeping the meeting in session suggests that there doesn’t need a lot of warning before OPEC + implements a policy change, which obviously puts the shorts on guard.
Fortunately, this move appears to have calmed the markets. Brent prices initially fell to $ 65.70 per barrel on news of the increase in production, but rebounded above $ 70 / bbl as the importance of the continuous virtual meeting was taken into account. account.
But Stanchart warned that if the empty virtual room creates a near-term bottom for prices, the fundamentals of the oil market remain uncertain. For example, while OPEC + delayed consideration of Omicron variant effects, there are still important Delta variant effects that were not considered or reflected in OPEC + policy, for example recent declines in mobility in Europe. This is reaffirmed by the last Energy Information Administration (EIA) report, which was very bearish.
Generic character of Iran
Another big reason that oil prices have recovered: Iranian nuclear negotiations recently came to a halt, delaying the return of Iranian crude.
After a three-year layoff, Iran appeared poised to officially join the ranks of oil exporters – possibly as early as 2022 – if Tehran and Washington are able to strike a new nuclear deal and Iran returns to power. Joint Comprehensive Plan of Action (JCPOA).
But so far indirect nuclear talks between the United States and Iran have run into obstacles after Iran reneged on its previous concessions.
The Biden administration is still seeking a return to mutual compliance with the 2015 nuclear deal with Iran, but also says it is “prepare for a world of no return. “
“It is not our preference. Each passing day is a day when we come closer to the conclusion that they don’t have a short term return to JCPOA in mind,“said an official, who briefed CNN reporters by phone, referring to a lack of compliance.
But how much could a new nuclear deal increase Iran’s oil production? More importantly, will investors start flocking to a post-sanctions Iran?
After all, former Iranian Oil Minister Bijan Namdar Zanganeh has publicly stated that his biggest dream has always been to increase Iranian oil production to six million barrels per day; earn $ 2 trillion from oil exports over the next two decades and use the proceeds to invest in the country’s development.
Clearly, such a level of production would cause considerable concern in the delicately balanced oil markets.
But how realistic are Iran’s oil ambitions and how worried should oil bulls be that another big producer might confuse everyone?
Last year, Biden rejected former President Donald Trump’s decision to withdraw from the JCPOA or the 2015 nuclear deal, which critics say is insufficient to prevent Iran from possibly acquiring weapons. nuclear. Negotiations started in early April, but that hasn’t stopped Tehran from increasing its uranium enrichment program and passing a new law to limit inspections by the International Atomic Energy Agency (IAEA) . The Islamic Republic initially allowed limited surveillance to continue for another three months until May 24, but rejected a new agreement with the IAEA to continue monitoring its activities related to the JCPOA.
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But as an OilPrice.com contributor Simon Watkins predicted in June, Iran’s dire economic situation was likely to force its hand to finally agree to oversight and signing a new nuclear deal, noting that Iran’s foreign exchange reserves had shrunk significantly and stood at around $ 10 billion, up from $ 114 billion just before the United States pulled out of the JCPOA in May 2018, when the country’s gold reserves are now insignificant. Watkins estimated that the rate of flight of foreign currency denominated capital out of Iran was around $ 4 to $ 4.5 billion per month, meaning the reserve could run out in less than three months.
And it seems he was right: in September, Iran has given its consent to the UN nuclear watchdog to maintain surveillance cameras at Iranian nuclear sites after the talks.
Assuming the Vienna talks resume at some point and the United States lifts sanctions on Iran, how much oil can we expect?
It is an open secret that Iran flouted US sanctions by applying several cover-up methods to evade detection and sell its crude oil to China.
According to Stanchart, Iran has increased production by 0.6 Mb / d / year, and an additional 1.4 Mb / d could return in 2022 if the Vienna talks are successful.
Source: Standard Chartered
Iran’s current production of around 2.5 million b / d is almost a million b / d less than the 3.48 million b / d the country pumped in 2016 and 1, 3 mb / d less than the 3.79 million b / d it managed in 2017. So Stanchart’s numbers appear to be in the range of what Iran can handle over the next year.
But increasing production from the current 2.5 Mb / d to 6 Mb / d could take at least several years.
Over the past four decades, Tehran has failed miserably to adequately reinvest its oil revenues into its productive capacity or to diversify its economy. Indeed, since the 1979 revolution, the Islamic Republic has at no time been able to produce more than 4 million bpd.
To complicate matters further, foreign investors have mostly stayed away from the Iranian economy during the four decades since the establishment of the Islamic Republic. In contrast, foreign investment – mostly oil-related – in its Arab peers, including Saudi Arabia totaled over $ 170 billion from 2006 to 2012, and have continued to grow at an annual rate of $ 10 billion since.
Part of the problem here is that the state-controlled economic model wastes over $ 50 billion a year on oil and gas subsidies to keep its citizens docile. The result is that Iranians enjoy the cheapest gasoline and electricity prices in the world, but face high unemployment and inflation due to an economy too dependent on petrodollars.
There is little reason to believe that the Raisi administration will do much to reform the economic model given the latest wave of populist promises of more subsidies.
By Alex Kimani for Oil Octobers
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